Comment: GOP’s tax cut bill is ill-timed for economic moment

By Kathryn Anne Edwards / Bloomberg Opinion

There are two distinct threats to the U.S. economy of 2025. One is the president’s shoot-first-ask-questions-later trade war, which has rattled both consumers and the bond market, not to mention economists. The other is the government’s projected annual deficit of $1.9 trillion, despite more than three years of low unemployment and consistent growth.

The first threat makes a recession more likely, and the second would make a recession harder to deal with. At the risk of crying wolf in the face of an economy that has yet to show any tangible signs of weakness, allow me to say: The House Republicans’ tax bill is so ill-suited to the moment that the most charitable conclusion is that they simply do not know how to manage the economy.

Where to begin.

The U.S. economy has had 13 recessions since World War II. After each downturn, the playbook is revised; informed by experience about what the economy needs as it contracts.

Nearly 70 percent of the U.S. economy is household consumption. So a critical component of macroeconomic stabilization is to prop up demand and keep households spending; or, to put it more bluntly, getting money to people who will quickly spend it. In general, the marginal propensity to consume is inversely related to income and wealth. Hence, during recessions, the government needs to get money and resources to low-income households and those who have lost their jobs.

The tax bill does the opposite. First, most of the benefits of the bill’s changes to the tax code flow to the top. The Center on Budget and Policy Priorities estimates that half of the bill’s benefits go to the top 5 percent highest income households, based on the structure of the prior Tax Cut and Jobs Act. The Tax Policy Center finds that 68 percent of the tax change accrues to the top 20 percent of households, while the bottom 40 percent gets just 6 percent.

In short, this bill does the exact opposite of what the government should do to stabilize demand in a recession. And to be clear, it also fails to boost aggregate demand outside of a recession: Higher income households can generally consume as much as they want, in good times and bad; when it comes to economic policymaking, they are the equivalent of a moot point.

Then there are the spending reductions to pay for those changes to the tax code. They are draconian (if not obvious) cuts to programs for households whose consumption is tenuous at best. The SNAP (food stamp) cuts are achieved mostly by making states share the cost of the program, ending its status as an entitlement and leaving it to governors to do the dirty work of dis-enrolling individuals or cutting benefits, either of which would curb household consumption.

But the Medicaid cuts are achieved by adding paperwork requirements for current beneficiaries so onerous that an estimated 10 million would lose coverage, according to the Congressional Budget Office. There is a lot of evidence from SNAP’s long history with work requirements, and what it shows is that enrollment drops while employment stays flat. It’s a cowardly way to kick someone off a program.

Nevertheless, for the sake of argument, let’s stipulate that work requirements have the intended effect and many recipients get jobs. What this policy change has done is essentially prohibit many unemployed from getting health insurance or food benefits. It’s a cruel move under any circumstances; and a catastrophic one in advance of a recession.

All this said, it’s hard to say what will prove more harmful to the economy: the bill’s policy provisions or its price tag. At a minimum, it will require $2.6 trillion in borrowing. Deficits are supposed to go up during recessions; that’s part of the federal government’s role in the economy, to borrow when state and local governments can’t. But running up deficits when the economy is strong all but guarantees that the next recession — whether it comes this year or not — will be more expensive.

It’s also a gamble. Last month’s bond market volatility is a warning: The credit of the U.S. government is not infinite. It has already been downgraded twice. It doesn’t require an official downgrade to make bonds harder to sell. And higher bond yields push up the cost of all kinds of borrowing for consumers. Upward pressure on interest rates can also clip the efficacy of the Federal Reserve’s monetary policy.

And what if a recession doesn’t come and the economy stays strong? Tax cuts are still weak, costly policy. Congress’s own research arm has consistently found that the 2017 Tax Cuts and Jobs Act did not significantly boost the economy.

Thus, if the economy falters, it’s a bad bill that will do real harm. And if the economy stays stable, it will just be needlessly expensive and ineffectual.